Housing Starts Tumble, While Inflation Edges Higher

The weaker business metrics continue to come in, with the latest softer data centering on the housing market. At the same time, inflation at the wholesale level ticked up, but just modestly.

Specifically, the Labor Department earlier this morning reported that the Producer Price Index (PPI), which tracks inflation at the wholesale level, rose by 0.2% in January. That was twice the 0.1% increase logged in December, and it was higher than the 0.1% forecast for the month. Note that the seasonally adjusted 0.2% January rise was derived under the government's new formula for measuring wholesale inflation. Meanwhile, excluding the volatile categories of food and energy, the so-called core PPI rose by 0.4% last month.

For the past year, U.S. wholesale prices have risen by an unadjusted 1.2%. That was little changed from December, but was the biggest 12-month increase in three months. Note also that the new PPI will include the wholesale cost of goods, as usual, and add services, construction, government and exports. Services such as retail, finance, education, and health care now represent a much bigger slice of the economy than goods-producing industries.

At the same time, food and energy costs also increased last month, rising by 1.0% and 0.3%, respectively. Our sense is that the weather was a contributing factor in each case for the higher prices. We could see a similar pattern in February, as much of the nation has been blanketed by major snows and record low temperatures. It has been that sort of a winter thus far. Overall, though, this was a fairly benign report and one that does not figure to change many minds at the Federal Reserve.

At the same time, the Commerce Department reported a big drop in housing starts last month, with that metric tumbling by 16% to an annualized rate of 880,000 homes started. Economists had forecast a total of 945,000 to have been started last month on an annualized basis. The declines last month were spread across single-family homes and apartments.

The reason for the sharp drop in starts and the clear underperformance by housing last month was the run of harsh weather, which made building much more difficult than it would normally be. Looking at the report, we find that starts totaled 1.048 million homes annually in December. In fact, the 880,000 January starts total was the lowest since last September, when ground had been broken on just 873,000 homes. Looked at as a whole, 2013 saw monthly annualized housing starts range from a low of 835,000 homes in June to a high of 1.101 million in November.

Looked at by regions, starts declined in all regions but the Northeast, which ticked up by 0.2%. However, this locale is the nation's smallest market. The larger markets, notably the South and the West, respectively, saw declines of 12.5% and 17.4% last month.

As to building permits, which are a more forward-looking barometer, the month-to-month decline was more modest. On point, such authorizations fell by 5.4% in January, from 991,000 to 937,000. Assuming this aggregate weakness was solely a weather event, building should increase again when warmer weather arrives in the spring. If the situation is more involved than just weather, our sense is that economic models would then need to be revisited.

At the time of this article's writing, the author did not have positions in any of the companies mentioned.